Jobs Growth Slows, Unemployment Ticks Up, Wage Increase Cools: 'The Market Should Love This Report'

In April, the U.S. economy added 175,000 jobs, falling short of expectations and down from the 315,000 jobs added the previous month.

Surprisingly, the unemployment rate inched up from 3.8% to 3.9%, although maintaining a level below 4% for the 27th consecutive month—a streak not seen since the late 1960s.

Nominal average hourly earnings growth slowed to 0.2% in April, slightly below expectations and a decrease from the 0.3% growth rate seen over the previous six months. Year-on-year, nominal wage growth decreased to 3.9%, failing to meet the anticipated 4%.

Overall, the April jobs report was cooler than expected, suggesting a shift towards a better rebalance between labor supply and demand, and indicating a slowdown in economic growth following several robust quarters.

Notably, this subdued jobs report has rekindled expectations for the Federal Reserve to ease monetary policy, with traders now pricing in a 71% probability of an interest rate cut by September, according to CME Group Fed Watch Tool.

Yields on Treasury bonds collapsed, with the 2-year yield dropping from 4.89% to 4.79%. Long-term bonds rose, with the iShares 20+ Year Treasury Bond ETF TLT up 0.6%. For the stock market, this has been another sigh of relief, effectively dispelling concerns over a tightening of Federal Reserve policies. The tech-heavy Nasdaq 100, as tracked by the Invesco QQQ Trust QQQ, rallied 1.5%.

Economists and analysts have begun to dissect the implications of this data for the markets and Federal Reserve policy.

There’s Little To Cheer On A Soft Jobs Report

“As I feared after Chair Powell’s presser on Wednesday, he probably already knew that a softer Job Report was on our way today,” Andrea Lisi, CFA stated. The expert expressed concerns about a potential economic downturn following the April jobs data, emphasizing that “this economic cycle is showing signs of mirroring many others, with a hard landing potentially on the horizon.” Lisi underscored the importance of the labor market, warning that “The average American’s financial health is far from robust, a situation that should raise serious concerns.”

Craig Shapiro, macro advisor for LaDuc Trading, also offered a more cautious perspective on the April’s jobs report, suggesting that the report’s implications might not be as positive as some might hope. “This is not unexpected weakness which is what Powell said he would need to see in order to commence cutting,” Shapiro explained. “I don’t believe this is reason to get excited about risk assets. I believe the opposite,” he stated. Shapiro highlighted that the economy is slowing down and the labor market has peaked, which is expected to gradually decline, but the sticky inflation will make the Fed’s job to cut more difficult.

Goldilocks Is Back, And Markets Should Love It

Mohamed El Erian, chief economic adviser at Allianz, presented a more positive spin, describing the jobs report as a “Goldilocks” scenario. He stated, “Still solid monthly employment creation of 174,000.” Lower wage growth of 0.2% (month-over-month) and 3.9% (annual). El Erian also highlighted the sustained labor force participation from the previous month, which he believes the Federal Reserve and markets will find appealing.

Also Larry Tentarelli, chief technical strategist at Blue Chip Daily Trend Report, described the report as a “Goldilocks payrolls report,” noting the cooling labor market as a positive development. “Finally, some weakness in the labor market to take pressure off bond yields and maybe accelerate rate cut expectations,” he observed. Tentarelli thinks that if inflation remains contained and job data continues to show moderation, the Federal Reserve might consider an initial rate cut in September.

Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, interpreted the report as favorable for the stock market. He remarked that “the market should love this report” due to the easing wage inflation pressures. Zaccarelli emphasized that “as long as the Fed maintains an easing bias,” the market outlook remains optimistic, predicting potential rate cuts within the year.

Higher Chances of Fed Easing

John Lynch, chief investment officer for Comerica Wealth Management, believes the data will bring monetary accommodation back into consideration, particularly as “the burden of proof is on corporate profits to exceed forecasts, providing fundamental support for equities in the coming months.”

According to Charlie Ripley, senior investment strategist for Allianz Investment Management, data from the April labor market report has softened the market’s perception of the U.S. economy’s strength and reopened discussions about potential rate cuts this year. He believes the Federal Reserve will view this data favorably, as it could alleviate some of the pressure associated with maintaining a higher-for-longer interest rate policy.

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Image generated using artificial intelligence via Midjourney.